What are shareholders’ agreements?

Are you in the process of starting a business? You may have heard about the importance of signing a shareholder agreement when partnering with shareholders.

Do you know what shareholders agreements are? Is signing one really that important?

Find out in this article.

The purpose of shareholders’ agreements

A shareholders’ agreement is a contract between the different shareholders of a company used to establish a clear procedure to follow in the case of unforeseen circumstances.

A shareholders’ agreement also formalizes a company’s general by-laws, structure and operations. Additionally, it establishes the extent of shareholders’ commitments to the company.

Why is signing the shareholders’ agreement important?

A shareholders’ agreement must be signed because it avoids legal disputes and misunderstandings between shareholders in the event of unexpected situations.

For example, if one of your shareholders dies but nothing is specified in a shareholders’ agreement, the deceased’s shares will go to his heirs instead of being redistributed to other shareholders. This can complicate your corporate taxation and organizational structure.

Anticipating all possible situations is therefore necessary so that you have a plan of action ready at all times. Common examples of unforeseen situations can include:

• A shareholder wants to sell their shares
• A shareholder goes bankrupt 
• A shareholder is fired

What to include in a good shareholders’ agreement

A good shareholders’ agreement must include some key elements, which take the form of clauses and terms and conditions.

Other than the previously mentioned information and elements, there are other types of clauses you may include in your shareholders agreement. Here are some examples.

The right to practice

A right to practice, also called the piggyback clause, protects minority shareholders in the event of a third-party buyout. Specifically, it gives small shareholders the right to resell their shares to a third party at the same price and under the same conditions as majority shareholders.

The non-compete clause

The non-compete clause protects incorporated businesses by prohibiting shareholders from investing in any other competing business.

The right of first refusal

The right of first refusal allows shareholders who wish to leave the company to resell their shares to other shareholders before offering them to third parties. Among other things, this clause helps maintain proportional ownership of the company's shares.

Start your company right with a shareholders’ agreement

In conclusion, shareholders agreements provide shareholders with appropriate steps to take in the event of unforeseen situations. This avoids related legal and tax complications and protects the company and its shareholders.

Need more information on taxation or the incorporation of a business in Quebec? At T2inc, our tax accountants can give you expert advice based on the needs of your business.

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